- The U.S. Supreme Court ruled in the recent South Dakota v. Wayfair, Inc. case that online businesses can be required to collect sales tax, even if they have no physical presence in the state.
- Individual states may look to enact and enforce their own unique regulations regarding sales tax.
- Tax services are available for businesses that need help understanding these complex requirements.
Forty-five states and over 10,000 jurisdictions tax the retail sales of goods and services within their state. Where regulated, sellers are required to collect and remit the tax to the state. Previously, a business needed to have a physical presence in the state to enforce a sales tax requirement. Critics viewed this as outdated and a way to give out-of-state sellers an advantage, causing significant revenue loss to the states.
South Dakota challenged this physical presence concept in court, seeking to require out-of-state sellers to register for licenses, and collect and remit sales tax for in-state goods and services sold.
On June 21, 2018, the Supreme Court ruled in a 5-4 decision in South Dakota v. Wayfair, Inc. that South Dakota was not restricted from collecting sales tax from a business that did not have a physical presence in the state. This means that tax revenue can now be realized from previously exempt internet retailers selling goods and services in the state. Learn more about the decision here.
Potential state response
States will likely use this ruling as an opportunity to more broadly levy sales tax on online purchases. While some may look to take regulatory action similar to the legislation set forth by South Dakota where sale amounts and transaction volume thresholds are factored, other states could seek to enact and enforce their own unique regulations.
Benefits and burdens
A new survey of retail businesses with fewer than 500 employees by Paychex reveals that small business retailers are largely split on how difficult it will be for their businesses to accommodate the pending changes to online sales tax, with 47 percent saying it will be difficult or very difficult and 53 percent indicating it will not be difficult at all.
On one hand, this most recent ruling is seen by many as a way for in-state businesses to even the playing field, taking away any perceived consumer benefit gained from purchasing goods from a company that did not collect sales tax. Instead, the tax burden is now shared by both consumers who purchase goods online and those who purchase from physical retailers. As a result, in the event that a state begins taxing out-of-state retailers, benefits could be realized by businesses with an in-state presence.
Sally Miller, president of Dobosh Service Center in Pleasant Hills, Pennsylvania sees the potential changes as a benefit to her small business. “It will greatly help. We sell lawn and garden equipment and we hear from customers that if they buy product online they won't have to pay sales tax, so we lose business because of this,” she says.
A new survey of retail businesses with fewer than 500 employees reveals that small business retailers are split on how difficult it will be to accommodate online sales tax changes: 47% say it will be difficult or very difficult, and 53% say it will not be difficult at all.
On the other hand, many businesses that have online transactions selling goods and services out-of-state could suddenly find themselves subject to the burden of complying with complicated regulations that were previously the responsibility of the in-state consumer. Further complicating the matter, each state may have unique rules governing sales tax based on the enforcing municipality within the state. Individual goods or services within those municipalities can be taxed at different rates, or be exempt altogether. This complexity could be particularly troublesome for small businesses that do not have the time or resources to sort out what could become hundreds of unique requirements.
Sandy Wolf, owner of United Auto Sales Inc. in New Castle, Delaware believes any changes to online sales tax could come at a cost to her small business. “We often ship parts out of state,” says Sandy. “As a very small family-owned business, it would be an extreme hardship to track, manage, and calculate sales tax for all the states, counties, etc. The ruling would effectively prevent us from being able to sell parts to out-of-state clients, resulting in lost revenue.”
States may offer similar protection as South Dakota, which allows the out-of-state tax requirement to impact only sellers that, on an annual basis:
- Deliver more than $100,000 of goods or services into the state, or
- Engage in 200 or more separate transactions for the delivery of goods or services into the state.
States may also seek to retroactively recoup sales tax obligations. South Dakota does not allow this.
Tax professionals are available to help with complex regulations
As businesses continue to examine the South Dakota ruling, we will monitor states’ reactions and proposals, and analyze potential ramifications to our clients. In the meantime, learn about services available to help simplify sales and use tax calculations, and keep pace with changing tax requirements and rates.